I appreciate the ambitious two-part primer on economics (“The Dynamics of Market Forces—Setting the Stage” and “The Dynamics of Market Forces—Squaring the Circle”) by Carlos Fuentes published in the May/June 2025 and July/August 2025 issues of Contingencies. After all, “market forces” are arguably as understandable as “human nature.” Furthermore, because Contingencies “explores the issues driving the insurance and financial services industries (and) … is written for actuaries as well as general readers with an interest in a range of financial and social concerns,” the articles on the contributions of famous economists is fundamental to that purpose.
As my boss told me in 1993, when Liberty Northwest tried to break into group health care with me as the product actuary, it’s one thing to get the rates right from an actuarial standpoint, but another to price them so employers will actually buy. As it turned out, they were not able to achieve the economies of scale, efficiencies, and provider contracted discount levels needed to generate a profit, and by 2000, like their parent company Liberty Mutual, they exited the group medical market. Thus, the economic fundamentals of “the market” are just as important, if not more so, than the actuarial basis. That is the rationale any actuary should have in committing to understand the principles touched upon in the series.
Of course, important considerations and foundational principles hinted at in length in the series, include that no economic model has ever fully explained anything, that economics is as complex as humanity itself, and that, as Steven Levitt and Stephen Dubner of the Freakonomics franchise say, their work “explores unconventional and surprising insights into various societal issues through the lens of economic theory and statistical analysis.” So, it’s not that economic theory and statistical analysis explain everything; they do not. Rather, they provide a framework or lens that allows issues to be better modeled. That is the reason—and an excellent one—that actuaries should understand economic principles.
Wes Edwards
A newly retired actuary